Are Dividend-Reinvestment Plans Risky?

By SmartMoney Staff

Question: How risky are dividend-reinvestment plans? Are they an easy way to start investing on my own, outside of my 401(k)?

– Jacob Shaw, Duluth, Minn.

Answer: Nothing’s risk-free, but advocates of DRIPs—which let you invest directly in individual companies without a broker—like that the plans encourage disciplined, long-term investing. (More than 900 U.S. firms currently offer them.) Designed to automatically reinvest dividends back into a firm’s stock, DRIPs help reduce the hazards—and heartburn—of market volatility, because you buy more shares when the price is low and fewer when it’s high. One cautionary note, says Michael Kalscheur, a senior financial consultant with Castle Wealth Advisors in Indianapolis: Such continual reinvesting can lead to overconcentration in a single stock. Also, the DIY nature of these plans can mean a drip, drip, drip of paperwork for those who invest in several stocks.

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